- Recaps hit record $47B in 2012
- Outlook is flat volume
- 2015 maturity wall not huge
Investors are pinning their hopes on rising M&A and LBO volume to offset an expected slowdown in refinancing activity in the U.S. leveraged loan market in 2013, as top banks issue mixed forecasts for volume, sister service Thomson Reuters Loan Pricing Corp. reported.
Refinancing and repricing loans dominated 2012. Nearly $190 billion, or 56 percent of total new institutional loan issuance was for refinancing, according to Thomson Reuters LPC data, as borrowers took advantage of low pricing to extend near-term maturities. “Refinancing will still be a large component of the supply, but it will have to shift more to M&A and LBO deals if we are to do the same volume this year as last,” said one leveraged loan trader.
Dividend recapitalization volume hit a record $47 billion in 2012, exceeding previous highs of $30 billion in both 2010 and 2005, as private equity firms used strong investor demand and competitive pricing to repay shareholders and issuers rushed to complete dividend recap deals before year-end to escape higher anticipated taxes.
Sources expect the dividend recap wave to subside in 2013 as many deals were pulled forward into 2012. “I don’t expect many dividend recaps to come back, and most companies have addressed 2013-2014 maturities,” said one senior credit analyst. “The 2015 maturity wall wasn’t huge. So the early forecast is a mellow year.”
JPMorgan estimates $91 billion of institutional leveraged loans to mature until the end of 2014, followed by $46 billion in 2015 and $137 billion in 2016. Major banks have published mixed forecasts of flat to increased volume in 2013. Demand from CLOs and yield-hungry investors is expected to stay strong, prompting opportunistic refinancing deals for longer term maturities in 2014-2016.
JP Morgan expects 2013 institutional volume to be in line with 2012. The firm sees volume staying robust, driven by the refinancing of 2014-2016 maturities, and continued strong demand from investors. Citigroup estimates a 20 percent increase in leveraged loan volume this year from 2012 levels. The bank expects supply to remain focused on refinancings and repricings, with only a moderate pick-up in private equity and M&A. Barclays is forecasting $225-250 billion of institutional loan volume in 2013, comprising about $100 billion of LBO and dividend recap activity, $50 billion in strategic M&A, and the remainder from opportunistic refinancing.
Barclays’ numbers imply refinancing volume of 33 percent to 40 percent of market activity, lower than 56 percent in 2012, according to Thomson Reuters LPC. Barclays’ data implies a jump in new LBO and dividend recap volume to 40-44 percent from 23 percent in 2012 while strategic M&A is expected to be flat.
Market strategists are advising against banking on a rash of M&A and LBO transactions in 2013. Private equity firms at a Citi Credit Conference in late 2012 said that they expect a small number of large private equity deals in 2013, one of the bank’s research reports said. “The wild card is M&A, but there’s not much optimism for that under the current regulatory regime,” said a senior credit analyst.
“Refis are mostly, but not entirely, done,” said another senior credit analyst. “M&A will take a leading role in transactions, but will it be enough?”
The leveraged loan pipeline is starting to build with nearly $15.5 billion on the institutional calendar as of January 10. Issuance is expected to build, sources said. “The auction calendar will take a few weeks to ramp back up. Expect to see a wave of repricings and add-ons to recent deals,” one leveraged strategist said. “
However, sources said the visible pipeline sparks and then thins out. “I think we’re busy for a few weeks and then it will get quiet,” said one leveraged loan trader.
Natalie Wright is a senior correspondent for Thomson Reuters LPC.